July 20, 2012

Last month, the CEO of San Diego-based Cubic Corp., Walter Zable, died. He was 97.

If people think working is bad for you, Zable proved that theory wrong, having gone to work every day since he founded Cubic in 1951 until just a few weeks before his death.

Cubic is known for its air and ground training systems used by militaries worldwide. Cubic also produces automatic fare payment systems for some of the world’s largest mass transit agencies, and it provides specialized mission support services.

In 1966, Cubic was the first company to install an electronic scoreboard in a San Diego stadium. The company’s technology was used on the Apollo space capsules, and Cubic's air combat training system was featured in the popular movie "Top Gun."

The stock trades under the symbol CUB and has a market cap just under $1.4 billion. The company, located in San Diego at 9333 Balboa Ave., has approximately 7,800 full-time employees.

The stock is currently pushing 52-week highs of $52, close to where it was one year ago. If an investor looked at the fundamentals around September and October of last year, they would be sitting on a 20-30 percent profit.

The current PE ratio for Cubic is 15.2, just above the industry average of 13.2. Price to sales checks in at 1.04 for the company and 0.89 for the industry average.

Price to cash flow favors the industry with a ratio of 10.2, compared to Cubic at 12.1. Cubic pays a small dividend of 0.5 percent using only 6.2 percent of its earnings to pay that dividend.

Year-over-year sales growth looks disappointing for Cubic at only 2.3 percent, compared to the industry average at 5.7 percent. Earnings-per-share growth does, however, favor Cubic by a wide margin, growing its EPS by 19.5 percent while the industry could only deliver a 9.8 percent growth on earnings per share.

I did take a quick look at the last eight income statements, and nothing stood out to me, which could mean the company has done a great job at cutting costs and has managed to get more profits to the bottom line.

The balance sheet is strong for Cubic. It has a current ratio of 2.22, of which most is in cash and short-term investments. Compared to the industry's current ratio of 1.48, Cubic is the clear winner here. Cubic carries only $12 million in debt on its balance sheet compared to equity of $604 million, which gives the company a debt to equity of 2.0 — well below the industry average of 60.8.

Going back a couple years, I noticed that the company shares outstanding have stayed around 26.7 million. With long-term interest rates where they are, I wonder why the company doesn’t take advantage of this, raise some debt and buy back some shares.

The company is also sitting on $200 million in cash. It could easily do a Dutch auction for 5 million shares and still have debt to equity of less than 50 percent.

Return on equity is 16.2 percent under the industry average of 21.7 percent. The net profit margin is 6.9 percent — close to the industry average of 6.8 percent. Receivable turnover could be a problem at five times over the trailing 12 months, compared to the industry at 7.1 times. Inventory turnover for the last 12 months looks great for Cubic at 24 times, well above the industry average of four times.

Based on the mean of six analysts, the year-end earnings per share are estimated to be $3.36, up only 3 cents over the last 90 days, while the stock is up nearly 12 percent. Based on the share price at $51 and the September 2013 estimated earnings per share of $3.36, this company has a forward PE of 15.3. The PEG ratio of 5.79 tells me that investors are paying a lot for the future growth of this company.

Zable did a great job building this company, but investors might be better suited waiting for another pullback in the stock before buying, or an increase in earnings per share, or maybe a Dutch auction.

While I know this stock or any stock can go up for no reason, the fundamentals generally hold true longer term, so be a patient investor.